Directors’ Duties

Directors' Duties - Shareholders’ rights

A company's shareholders are its owners, whereas the day-to-day running of the company is the responsibility of the Board of Directors. There is often an overlap between these two roles, particularly with smaller companies. However, both roles carry clearly defined and different rights and responsibilities.

Day-to-day rights

These depend on the size of the shareholding. Typically a smaller shareholding carries the right to receive company in­formation and to call and attend company meetings. Depending on the size of the share holding it may also carry a right of veto against certain decisions. Conversely, the taking of positive action typically requires at least a simple majority and, for special resolutions such as to change the company’s constitution, 75% of the voting shares.

Shareholders agreements

A shareholders agreement is a contract between the shareholders, which gives additional rights and responsibilities to those set out by statute. They are private documents unless they override the company’s Articles of Association and, in general, govern only the relationship between the parties to the agreement.

Common provisions in a shareholders agreement will cover the:

right to appoint and dismiss directors

terms on which certain key business decisions are made

terms on which a shareholding can be bought and sold

Rights against directors

Shareholders will generally have the right to appoint and remove the directors. The default position is that this requires 50% of the shareholders to agree, although this is often varied by an amendment to the company’s articles or by share­holders agreement.

Directors owe duties to the company pursuant to the Companies Act 2006. If the directors breach such duties the company can take the appropriate legal action against the directors. This could include an application for an injunction (to prevent further loss occurring), the setting aside of a transaction and claims for damages and an account of profits. However, if the shareholders cannot cause the company to do so (because the company is controlled by the directors in question), the shareholders can, with the permission of the Court, bring a claim against the directors on behalf of the company.

Minority shareholders may also have the option to bring an unfair prejudice claim if the company’s affairs are being conducted in a way unfairly prejudicial to them. If successful, the Court can award injunctive relief or order that the minority shareholding be bought out by the majority at market value.